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DNB, SB1 SR-Bank, SB1 SMN, SB1 Nord- Norge, Sparebanken Vest & Sparebanken More

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DNB, SB1 SR-Bank, SB1 SMN, SB1 Nord- Norge, Sparebanken Vest & Sparebanken More FINANCIAL INSTITUTIONS ISSUER IN-DEPTH DNB, SB1 SR-Bank, SB1 SMN, SB1 Nord- 19 October 2020 Norge, Sparebanken Vest & Sparebanken More Norway’s oil-exposed lenders are insulated against weak oil prices Contacts We expect the six Moody’s-rated Norwegian banks with exposure to the oil sector to Nondas Nicolaides +357.2569.3006 preserve their current strong capitalisation and creditworthiness, despite an increase in their VP-Sr Credit Officer [email protected] problem loans due to a steep coronavirus-induced drop in oil prices. The lenders' oil exposure remains relatively limited, and their core profitability is solid, helped by continued good Niclas Boheman +46.8.5179.6561 VP-Senior Analyst income generation from their dominant mortgage lending operations. While downside risks [email protected] remain, their strong capital buffers are also supportive of their solvency and ratings. Katarzyna +44.20.7772.1047 Oil price slump pushes up problem loans. The price of Brent crude oil fell by 78% Szymanska Associate Analyst between February and April 2020 as the coronavirus-related economic downturn led to a [email protected] sharp fall in global energy demand, although it later partly recovered. The decline triggered Simon James Robin +44 207 772 5347 loan repayment difficulties among some Norwegian oil sector borrowers, including owners of Ainsworth offshore service vessels. This was a key factor behind an increase in the six banks’ weighted Associate Managing Director average non-performing loan (NPL) ratio to around 1.9% in Q2 2020 from 1.4% a year [email protected] earlier. DNB Bank, one of the largest banks and the most exposed to the oil sector, suffered Sean Marion +44.20.7772.1056 the most significant asset quality deterioration. MD-Financial Institutions [email protected] Modest exposure and good provisioning capacity are strong mitigants. All six banks have limited exposure to the oil sector, which accounts for between 0.7% and 4.5% of their CLIENT SERVICES total loan books. At the same time, their profitability, their main buffer for absorbing loan Americas 1-212-553-1653 loss provisions, is solid, helped by good income generation from their core mortgage-lending Asia Pacific 852-3551-3077 activities. We expect the Norwegian banks to continue posting strong pre-provision profits, Japan 81-3-5408-4100 thus generating strong capacity to absorb oil-related loan losses, and continue building EMEA 44-20-7772-5454 capital. Compared with banks in other jurisdictions, which suffered significant credit losses in the first half year 2020, Norwegian banks have been able to comfortably cover the increase in provisions from their pre-provision income. Banks benefit from ample capital cushion. The banks’ Common Equity Tier 1 (CET1) capital significantly exceeds minimum requirements, ensuring that their capital base is well cushioned against potential losses. We do not expect these buffers to change significantly as a result of a scheduled 150 basis point (bps) increase in the systemic risk buffer in December 2020. All banks remain profitable and will generate more organic capital by the end of the year, as the regulator limits their dividend payouts. MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS Oil price slump pushes up problem loans World oil prices fell steeply in the first quarter in 2020 as the onset of the coronavirus pandemic halted much economic activity across the globe, triggering a steep fall in energy consumption. The benchmark Brent crude oil price fell by 78% to just over $9 per barrel between February and April 2020. It had partly recovered to approximately $40 per barrel by early October, reflecting a gradual resumption of economic activity as government restrictions designed to halt the spread of the virus eased. We expect the oil price to fluctuate between $40 and $60 a barrel in the medium term. The drop in oil prices has had negative consequences for oil exporting nations and their banks, which typically have lending exposure to the oil sector. In Norway, the six Moody’s-rated banks that have exposure to the country’s oil sector – DNB Bank, SpareBank 1 SR-Bank, SpareBank 1 SMN, Sparebanken Vest, SpareBank 1 Nord-Norge and Sparebanken More – all reported an increase in problem loans as more borrowers in the oil sector and related industries began to experience repayment difficulties. The six banks’ weighted average ratio of non-performing loans (NPLs) to gross loans rose to 1.9% in Q2 2020 from 1.4% a year earlier, with DNB Bank suffering the biggest deterioration as its NPL ratio increased to 2.1% from 1.6% over the period (see Exhibit 1). Exhibit 1 Key performing indicators for the six banks in Q2 2020 DNB SB1 SR-Bank SB1 SMN SB Vest SB1 Nord-Norge SB More Total Assets 2,652,638 282,913 234,957 217,588 155,632 81,239 CET1 ratio 18.0% 18.3% 17.2% 18.1% 16.9% 17.3% CET1 requirement 15.7% 12.7% 12.9% 12.7% 12.5% 12.7% Leverage ratio 6.6% 7.8% 6.9% 7.0% 7.4% 7.7% LCR 130% 159% 163% 145% 162% 172% ROE - Q2 2020 8.4% 4.0% 10.3% 12.2% 12.9% 9.2% ROE - YE 2019 11.1% 14.0% 13.7% 12.1% 15.9% 11.7% Cost/Income 41.2% 34.2% 45.9% 32.1% 39.2% 43.5% NPLs - Q2 2020 2.1% 1.7% 1.4% 0.8% 0.4% 1.9% NPLs - Q2 2019 1.6% 1.0% 1.2% 0.6% 0.4% 1.6% Note: Total Assets and NPL ratios are Moody's Adjusted figures. Source: Company reports and investor presentations, Moody's Investors Service While the increase in NPLs also reflects some coronavirus-related asset quality deterioration outside the oil sector, oil-related problem loans were a key driver of the banks’ NPLs and provisioning needs in the first half of the year. In Q2 2020, DNB Bank classified some NOK2.7 billion of loans to the oil, gas and offshore sectors as “Stage 3” loans (having around 3.8% NPL ratio for the portfolio), the most seriously impaired category under the IFRS 9 accounting standard. This compares with NOK1.55 billion in Q1 2020. Over the first half of 2020, the oil and offshore sector accounted for 60% of DNB Bank’s provisions of NOK7.9 billion, and for the bulk of SpareBank 1 SR-Bank's total impairments of NOK1.4 billion during the same period. Norway’s non-oil economy began to grow again in late April as restrictions designed to control the spread of the virus were lifted. However, we still expect the country’s real GDP to contract by around 4% in 2020, and to exceed its 2019 level only in 2022. The economy will receive some uplift from a reduction in the central bank's benchmark rate to 0% in May 2020 from 1.5% in March 2020. This will support debt affordability and thus the Norwegian banking sector’s asset quality, but will also weigh somewhat on its net interest margins. Modest exposure and good provisioning capacity are strong mitigants Although downside risk remains, we believe all six banks have sufficient capacity to absorb oil-related increases in credit costs, protecting their capital base. Our view partly reflects the banks’ moderate exposure to the oil sector, which has been declining as a share of total lending in recent years. Oil-related loans range from a low of 0.7% of SpareBank 1 Nord-Norge’s total loan book to a high of just 4.5% for SpareBank 1 SR Bank as of June 2020 (see Exhibit 2). DNB Bank’s oil exposure is the largest of the peer group in absolute terms, but accounts for only 4.2% of the bank's total loan book. This reflects DNB’s large size in the local banking system. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 19 October 2020 DNB, SB1 SR-Bank, SB1 SMN, SB1 Nord-Norge, Sparebanken Vest & Sparebanken More: Norway’s oil-exposed lenders are insulated against weak oil prices MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS Exhibit 2 Oil-related loan exposure is moderate for all six banks Reported loan exposure as % of gross lending 5% 4.5% 4.2% 4% 3% 2.5% 2% 1.7% 1% 0.8% 0.7% 0% DNB Bank SR-Bank SMN More Vest Nord-Norge Note: The ratios in this chart relate to only on-balance sheet loans, and do not represent exposure at default (EAD). Source: Company reports and investor presentations The peer group’s exposure to oil and related sectors has declined since the last oil price downturn, which occurred between 2014 and 2016. All of the banks reported lower absolute lending exposure to the oil and offshore industries in Q2 2020 relative to 2015 (see Exhibit 3). DNB Bank's oil, gas and offshore exposures amounted to around NOK100 billion of exposure at default (EAD), or 4.8% of total EAD, as of 30 June 2020, down from NOK167 billion (8.4% of total EAD) in September 2015. The bank's oil-related and shipping exposures have fallen by 40% and 56% respectively since 2014 (see Exhibit 4). Exhibit 3 Savings banks have lower absolute exposure to the oil sector than in 2015 Reported gross lending to oil/offshore sector by bank 2015 Q2 2020 11,000 10,000 9,000 8,000 7,000 6,000 5,000 NOK NOK million 4,000 3,000 2,000 1,000 - SR-Bank SMN More Vest Nord-Norge Note: The figures in this chart relate to only on-balance sheet loans, and do not represent exposure at default (EAD).
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